Tuesday, August 24, 2010

A Bounce and Little More

The following is primarily for those who are very short term oriented.

I have some bad news for the bulls: the hoped for bullish non confirmation is not occurring. Here's why:

The first chart shows the internal divergence dynamics of the market. What you see are lower lows being made in momentum and MACD. Contrast that with the July 2 low when momentum was going sideways and MACD headed upward. In both cases, the short term indicator, slow stochastics, is oversold and lends itself toward helping a sold out market bounce.

It is also worth pointing out that on July 2 the Mega Trend* was in modestly better bullish shape. This time, it is right on the cusp of a bearish call.

The second chart illustrates the external divergence dynamics and compares the S&P 500 to the EAFE (EFA), Asia Pacific ex Japan (EPP), Europe 350 (IEV), and Emerging Markets (EEM). At present, all markets (save EEM) are making confirming lower lows. And EEM is just a hair away from joining the parade. Contrast that (through the spaghetti lines) to the price lows made by most markets in late May, which when the S&P 500 made a lower low on July 2 the other markets did not. All of them save none were at or above their May lows, including the sick man of markets - Europe.

Bottom Line: Bounce potential exists. Then we have to do it all over again and make non confirmed lower lows. One bright spot in all this - there is the real potential of a more significant bullish non confirmation call should stocks bounce then slip below the current lows. In the process of the bounce, emerging markets might take themselves sufficiently high enough that the lower low in developed markets will more clearly not be confirmed. The dark lining on this seemingly silver cloud is the fact that in the process of making that lower low in the S&P 500 the Mega Trend will likely turn bearish.

As noted many times since the end of last year, nothing has been easy for equity investors this year.

Note: There is another serious issue to consider - the recent poor relative performance in small and micro cap issues. I will describe this issue tomorrow.

*Use the search function in the top left area of this blog to read comments and definitions on the Mega Trend.

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